Brokerages remain cautious on Infosys, stock down 12% in 2012

NEW DELHI: Infosys Ltd has been languishing so far in the year 2012 due to lackluster quarterly performance, slowdown in business environment and faltering demand in its financial services vertical.

Bank of America-Merrill Lynch has retained its 'neutral' rating on the stock with a target price of Rs 2,450 and warned that discretionary IT spending, which makes up for higher proportions of its revenues, has seen no pick-up, while demand from financial services 'remains challenged' in the near-term.

BoA-ML has indicated that pricing is broadly stable, although competition led pressure is likely to remain in select accounts. The IT major also suffers from some internal challenges such as organizational and leadership transition, no decision yet on timing of annual wage hike and on campus hiring.

UBS too has maintained a 'neutral' view on the stock with a target price of Rs 2550.

Echoing the same thought, CLSA has maintained 'underperform' rating on the stock as contraction in financial services vertical is likely to weigh on the company.

A PTI report quoting Kris Gopalakrishnan on Thursday clarified that the discretionary spending is coming back in the US and Europe, "besides we are winning deals in India."

The stock has corrected nearly 12 per cent so far in the year 2012. However, if we look at the performance of Infosys for the month of August, the stock has given a positive return of nearly 10 per cent.

The stock of Infosys crossed the Rs 2,400 mark this week (on Tuesday) for the first time since its quarterly results on July 12.

A favourable decision by a US district court in a lawsuit filed by a former employee, Jack Palmer, has helped the stock pepped up in this past week.

Brokerage firms are of the view that the win over the Palmer case may provide near-term upside to the stock as the management can concentrate on the business now and the clients could renew projects, who were awaiting clarity on the case.

"Decision is a short-term positive for the stock given the lack of a trial and the resulting potential for negative press coverage," Wells Fargo Securities said in a note.

"However, the issue remains unresolved, as we note that a grand jury investigation of Infosys visa usage is still outstanding and a second whistleblower alleging similar visa misuse and retaliation by the company also remains," said the report.

But the decision would not be sufficient enough to regain the ground it has lost to some of its peers. In the June 2012 quarter, Cognizant toppled Infosys from the second spot in terms of quarterly revenue.

The PTI report quoting Infosys Executive Co-Chairman Kris Gopalakrishnan said, "Business sentiment in the US is better than Europe on account of the dynamic nature of its economy."

"They (US) have adjusted. I would say that they have recovered also to some extent. Growth rate has picked up to 2 to 2.5 per cent. Europe is still trying to figure out solutions. So, the business sentiments in the US is better than Europe," Gopalakrishnan added.

"Bellwethers Infosys and Wipro face fresh challenges, Tata Consultancy Services (TCS) has marched ahead and HCL, which looked like an also-ran prior to 2008, has risen like a phoenix," ET reported.

"The gap between TCS and No. 2 Infosys has widened from $1 billion three years ago to more than $3 billion today. Infosys slipped to the No. 3 slot in the pecking order, with Cognizant overtaking Wipro in 2011 and Infosys exactly a year later, in the June quarter," added the report.